Deforestation in the Amazon: A Unified Framework for Estimation and Policy Analysis

Deforestation is a matter of pressing global concern, yet surprisingly little is known about the relative efficacy of various policies designed to combat it. This paper sets out a framework for measuring the cost effectiveness of alternative policies – both command-and-control and incentive-based – in the Brazilian Amazon. First, I estimate the demand for deforestation on private properties, exploiting regional variation in transportation costs as a means to recover farmers’ responses to permanent policies. Here, rescaling transportation costs using local yields allows me to express changes in farmers’ valuations in dollars per hectare. I then use the estimated demand to infer farmers’ willingness to deforest under different counterfactual policies, such as payments to avoid deforestation and taxes on land use, along with the corresponding potential farmers’ lost surpluses. The results indicate that payment programs and land-use taxes on agricultural land can be highly effective in preserving the rainforest and also be substantially less expensive than command-and-control policies (approximately 8 times less costly). A carbon tax equal to the social cost of carbon could virtually eliminate all agricultural land in the Amazon, given the low agricultural returns there.